Credit Score Myths Debunked

Myths about credit scores arise from not understanding what factors are taken into account when the scores are calculated. Credit scores generally range from 300 to 850, and creditors and lenders view higher scores more favorably. Yet maintaining a high score involves more than just paying bills on time.

Balances

People who pay off their credit-card balances each month may assume that's enough to maintain a good credit score. Yet credit scores can be adversely affected by how much available credit a person uses. For example, someone who charges $3,500 to a credit card with a $5,000 limit may see his credit score drop, even if the balance is paid in full when the bill arrives. Some financial publications recommend consumers use less than 25 to 30 percent of their available credit at all times. That's because account balances used to calculate credit scores typically come from a consumer's most recent bill. Scores can drop because recent high balances may make it appear a person is maxing out credit lines even when balances are paid in full.

Employment

A stable job with a high income doesn't guarantee a person will have a good credit score. High bank account balances and investment portfolios also don't affect the score. Credit histories are only affected by how people manage their bills, credit cards, mortgages and other loans.

Debts

Some people avoid accumulating debts to maintain a good credit score. However, the responsible use of credit lines and loans is what helps consumers qualify for mortgages, low interest rates, low insurance premiums and other items. Creditors, insurers and lenders look at credit histories and scores to determine how risky it would be to approve an insurance policy or loan or to extend a credit line. People who haven't accumulated any debts often need cosigners on loans and credit cards because they haven't established a track record of responsible debt management.

Payments

Paying credit-card bills and loans long before the due dates won't necessarily prevent late payments or negative marks on a credit report. It's better to strategically time partial payments if you want to pay bills early or pay them off quickly. Your statement should show a closing date, which is the last date on which charges are calculated. Send one payment near the closing date and another payment just before the due date. The first payment will reduce your balance and may help bolster your credit score. The second payment will prevent you from getting hit with late fees. A CBS News report titled "Biggest Credit Card Myths Debunked" notes that some credit-card companies require payments between the closing date and due date, even if an earlier payment has been sent by a cardholder.

Credit Reports

The U.S. Fair Credit Reporting Act allows consumers to get one free credit report from each of three nationwide credit-reporting companies every year. Those companies are Equifax, Experian and TransUnion. However, that does not mean consumers receive their credit scores with those reports -- credit scores are usually provided by the companies for a fee. Yet the U.S. Federal Trade Commission notes on its website that it's still important to check your credit reports to ensure they don't include inaccurate, negative information that could lower your credit score.